MGF Exam 3

A proposed project will increase a firm's accounts payables. This increase is generally:

A cash inflow at time zero and a cash outflow at the end of the project

Which of the following costs probably should not be allocated to the new investment needed for a new project?

A portion of the vice presidents salary

New projects or products can provide positive indirect effects as well as negative effects. Which one of the following appears to be a negative indirect effect?

Customers orders of supplies for the firms existing products are expected to decrease

The internal rate of return is the

Discount rate that results in a zero net present value for the project

For mutually exclusive projects, the project with the higher IRR is the correct selection

False

If a project has multiple IRRs, the lowest one is incorrect

False

The IRR is the rate of return on the cash flows of the investment, also known as the opportunity cost of capital

False

the payback rule always makes shareholders better off

False

When projects are mutually exclusive, you should choose the project with the?

Highest NPV

Any change to a firm's projected future cash flows that are caused by adding a new project are referred to as?

Incremental cash flows

what is the effect of using 100% bonus depreciation rather than straight-line depreciation?

It increases the NPV of a project

The modified internal rate of return (MIRR) can be used to correct for

Multiple internal rates of return

A project requires an initial outlay of $10 million. If the cost of capital exceeds the project IRR, then the project has a

Negative NPV

Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities

Net present Value

When a project's internal rate of return equals its opportunity cost of capital, then the:

Net present value will be zero

When is it appropriate to include sunk costs in the evaluation of a project?

Never

Which one of the following can be defined as a benefit-cost ratio?

Profitability index

Which of the following investment criteria takes the time value of money into consideration?

Profitability index, internal rate of return, and net present value

The net working capital invested in a project is generally

Recouped at the end of the project

A cost should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as a?

Sunk Cost

Which of the following statements is correct for a project with a positive NPV

The IRR must be greater than 0

if a projects NPV is calculated to be negative what should a project manager do?

The project should rejected

Marco-economics events only are reflected in the performance of the market portfolio because:

The specific risks here have diversified away

Selecting the project with the highest NPV is not the correct decision when

There is capital rationing

Selecting the projects with the highest NPV(s) is not the correct decision when?

There is capital rationing

A reduction in working capital increases cash flows

True

As a project comes to its end, there is a disinvestment in working capital, which also generates positive cash flow as inventories are sold off and accounts receivable are collected

True

Capital budgeting analysis focuses on cash flow as opposed to profits

True

Sunk costs do not affect the net present value of a project.

True

Suppose you finance a project partly with debt. You should neither subtract the debt proceeds from the project's required investment, nor would you recognize the interest and principal payments on the debt as cash outflows.

True

The capital pricing model (capm) assumes that the stock market is dominated by well-diversified investors who are concerned only with market risk

True

The total depreciation tax shield equals the product of the depreciation and the tax rate.

True

When using a profitability index to select projects, a high value is preferred over a low value

True

when a firm makes an investment in working capital, the cash is usually recovered later.

True

Beta mesures

a stocks sensitivity to market risks

If two projects offer the same positive NPV, then they:

add the same amount of value to the firm

A project can have as many different internal rates of return (IRR) as it has:

changes in the sign of the cash flows

100% Bonus Depreciation method allows an increase?

in depreciation in the initial year only

Security Market Line

relationship between expected return and beta

The opportunity cost of an asset

should be included in the project cash flows

Investors require a risk premium as compensation for bearing ______________.

systematic risk

When a depreciable asset is ultimately sold, the sales price is:

taxable to the extent that the sales price exceeds book value

market risk premium

the slope of the SML - the difference between the expected return on a market portfolio and the risk-free rate